RUTH SUNDERLAND: Eroding the independence of central banks and turning them into the cat's-paws of politicians can have disastrous consequences

Donald Trump's attacks on Jay Powell, the head of the US central bank, are outrageous and by impugning the independence of the Federal Reserve, he is on very dangerous ground.

The President posed a rhetorical question on Twitter as to who is the bigger enemy of the US, the president of China or the chairman of the Fed?

Powell's crime is that, on monetary policy, he has had the temerity to follow his own judgment – and that of his fellow members of the committee that sets interest rates – rather than kowtow to the White House.

On the attack: Donald Trump's attacks on Jay Powell, the head of the US central bank, are outrageous

Trump's outbursts undermine the principle of central bank independence that has since the 1990s been the norm in the UK, the US and Europe.

Markets tend to be alarmed by politicians lashing out like this, interpreting it as a sign they are seeking a scapegoat for an unstable economy. But Trump is not the only one. Governors around the world are increasingly taking a battering.

Here, Mark Carney has been lambasted by Brexiteers for the scenarios he used to stress-test the financial system to see if it can cope with a No Deal departure.

Jacob Rees-Mogg branded him a 'second-tier Canadian politician', a 'wailing banshee' and 'hysterical', while Iain Duncan Smith recently accused him of being one of the architects and promoters of Project Fear.

Never mind that many of those savaging Carney heaped praise on his head when he produced an analysis five years ago that weighed against the Scottish independence campaign. If the Governor does not produce their desired conclusions, hardline Brexiteers conclude he must be biased.

There have been also political encroachments on central banks in Turkey and in India. President Recep Tayyip Erdogan – who believes high interest rates fuel inflation, which is, to put it politely, an unorthodox view – sacked the governor of the Turkish central bank. The Reserve Bank of India's governor resigned last year after clashing with Prime Minister Narendra Modi.

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This should worry everyone. The reason central banks became independent is that history shows politicians do not behave responsibly if in charge of monetary policy.

We need only go back as far as the 1970s for evidence. Back then, inflation was rampant but governments were reluctant to tackle it because they did not want to be blamed for the unemployment that would follow.

By contrast, once central banks were granted independence, they maintained the low and stable inflation which we take for granted. Perhaps too much so.

With the ravages of spiralling prices largely forgotten, central bank governors are easy whipping boys for populist politicians and their supporters in a climate where experts are distrusted. Clashes between politicians and central bankers are not new.

Jay Powell could even be getting off lightly, compared with, say, William McChesney Martin, the architect of the modern Federal Reserve, who upset President Truman by refusing to cut interest rates in the 1950s.

Several years later, seeing him on the street, Truman hissed 'traitor' at him. In the 1960s, Lyndon B Johnson summoned Martin to Texas, pushed him against a wall and said: 'My boys are dying in Vietnam and you won't print the money I need.'

Despite these encounters, Martin's chairmanship lasted from 1951 to 1970 and he served under five presidents. So politicians may come off worst if they bash bankers.

Central bank governors are, of course, as open to criticism as anyone else. They are extremely powerful and should be accountable to the citizens they serve.

There is a legitimate debate to be had over their use of unconventional tools after the financial crisis, such as quantitative easing or money-printing, which has been blamed for over-inflated stock markets and widening inequality.

But eroding their independence and turning them into the cat's-paws of politicians can have disastrous consequences.

Boris Johnson should remember this in his dealings with the new governor who replaces Carney in January.

Hard cheese

Terrible news for turophiles – a new word to me but which, as erudite readers will know, means 'cheese-lovers'.

An article in The Grocer says the prices of continental cheeses are rising due to the fall in sterling and declines in milk production.

More bad tidings: blue-veined cheese from the EU, apart from Roquefort and Gorgonzola, which are for some reason exempt, will have tariffs imposed in a No Deal Brexit.

At least it's good for the waistline.

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RUTH SUNDERLAND: Turning central banks into the cat's-paws of politicians can be disastrous

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